American criminal Willie Sutton famously said that he robbed banks "because that's where the money is". Sutton's law needs to be applied in the NHS as the government looks for cash savings of £15bn-£20bn between 2011 and 2014. Most of the money in the NHS is put into acute hospitals, and evidence I have recently reviewed for the Nuffield Trust suggests huge potential to use this money more efficiently.

The government's dilemma is that it risks sucking more resources into hospitals with current policies centred on increasing choices available to patients, and ensuring that money follows patient choices. The income of hospitals rises as they treat more patients under the system of "payment by results", designed to reduce waiting for treatment.

The risk of more money being spent on hospitals is accentuated by the requirement that NHS foundation trusts generate surpluses for reinvestment. With an NHS recession imminent, and new priorities relating to prevention and long-term conditions having been established, a radical rethink is needed. At its heart must be the challenge of shifting resources out of acute hospitals.

The work of the NHS Institute for Innovation and Improvement has shown that savings of at least £3bn are available through reducing the length of time patients stay in hospitals and undertaking more operations as day cases. Even more important is the need to achieve closer integration between services provided in hospitals and those delivered in the community. A quarter of hospital beds are occupied by patients who should be cared for elsewhere.

In implementing integrated care, a fundamental change is required to the incentives facing NHS foundation trusts. Instead of being paid to treat more patients in hospitals, they should benefit when they support people to remain independent, thereby avoiding the need for admission. Over time, this should reduce reliance on hospital care and enable more services to be provided closer to home.

Comparisons have shown that the use of hospital beds is three times higher in the NHS than in the best health maintenance organisations in the US. In those organisations, hospitals are cost centres rather than profit centres, and incentives are aligned to support the provision of care in the most cost effective locations.

The imperative to integrate care, however, runs counter to the increasing fragmentation that has accompanied the expansion of patient choice and the application of market principles. It also conflicts with the work of the Co-operation and Competition Panel, which was set up last year to break down barriers to market entry in the NHS.

The biggest risk in the approach proposed here is that integrated organisations could turn out to be unresponsive monopolies that act as a brake on change, rather than as a force for necessary reform. To address this risk, the government must fast-track its programme of support for primary care trusts to enable them to countervail the power of providers. A package of policy changes of this kind should help to realise the savings in the NHS suggested by Sutton's law.

• Chris Ham is professor of health policy and management at Birmingham University. His new report, Health in a Cold Climate, can be downloaded here